The 7 Costs A Mortgage Calculator Does Not Show You

A friend sent me a listing and a screenshot of a mortgage calculator. The house was $420,000 and the calculator said $2,389 a month, which was less than he was paying in rent. He wanted to know whether that could possibly be right.

It was right. It was also about two thirds of the answer.

$3,587.

That is what the same house costs per month once the things the calculator does not ask about are added in. Nothing below is exotic and none of it is optional.

What the calculator is quoting

Principal and interest, usually shortened to P and I. Principal is the part of each payment that reduces what you owe, and interest is the part that goes to the lender for the privilege of owing it.

The inputs are price, down payment, rate and term. Put $42,000 down on $420,000, which is 10 per cent, and you borrow $378,000. At an example rate of 6.5 per cent over 30 years that is $2,389.22 a month.

The rate above is an example and rates move constantly, so run your own. What does not move is the shape of the arithmetic: 360 payments of $2,389 is $860,119, of which $482,119 is interest, because 860,119 minus the $378,000 you borrowed is what the lender kept.

That number tends to land harder than the monthly one. It is also not the subject here, because it is at least a number the calculator will show you if you scroll.

The seven it leaves out

1. Property tax

Your county assesses a value and applies a rate to it. Say the effective rate is 1.2 per cent of value: on $420,000 that is $5,040 a year, or $420 a month.

Rates vary enormously between counties and even between towns inside one county, from under half a per cent to well over two per cent, so a national average is useless to you. The good news is that this figure is public. Search the county assessor's site for the actual address and you will find what the current owner pays.

Check whether a sale triggers a reassessment where you are buying. In some places the tax bill resets to the price you just paid, which can be meaningfully higher than what the seller has been paying for eleven years.

2. Homeowners insurance

Call it $1,800 a year on a house at this price, which is $150 a month, though the range is wide and coastal, wildfire and hail exposed regions run far above it.

It is not optional. A lender will require coverage as a condition of the loan, and if you let it lapse they will buy a policy on your behalf and bill you for a worse one.

3. Mortgage insurance

PMI, or private mortgage insurance, is a premium you pay that protects the lender if you stop paying. It applies on most conventional loans when the down payment is under 20 per cent.

The premium commonly runs somewhere around 0.5 per cent of the loan a year, though it varies with credit score and down payment. On $378,000 that is $1,890 a year, or $157.50 a month, for insurance that pays out to somebody other than you.

It comes off conventional loans once you reach a defined equity threshold, and the rules for requesting removal differ from the rules for automatic termination. Some government backed loans carry their version of it for the life of the loan, which is a detail worth pinning down before you choose a loan type rather than after.

4. Maintenance

The common rule of thumb is 1 per cent of the purchase price a year, which on $420,000 is $4,200 a year, or $350 a month.

It does not arrive as $350 a month. It arrives as nothing for two years and then a $9,400 roof, or as a water heater that fails on a Sunday and costs $1,900 to replace on a Sunday.

Older houses run above the rule and new builds run below it for the first few years. Treat the 1 per cent as a savings target you fund monthly and spend irregularly, which is the only way the number is any use.

5. Association fees

Zero on a detached house with no association. Anywhere from $250 to $900 a month on a condo, and the number is set by a board that can raise it by vote.

The one that catches people is the special assessment, which is a one off charge levied on every owner when the building needs something the reserve fund cannot cover. Read the association's reserve study and the minutes of the last two years of meetings. A healthy reserve is the difference between a predictable fee and a $14,000 letter.

6. The utilities you did not pay as a renter

Water, sewer and trash are frequently bundled into rent and never bundled into a mortgage. Add a larger space to heat and cool than the apartment you are leaving, and call the difference $120 a month.

Ask the seller for twelve months of utility bills. They usually have them, and a real year of bills beats any estimate I could put in a table.

7. The costs that only happen once

Closing costs run roughly 2 to 5 per cent of the price for a buyer. At 3 per cent on $420,000 that is $12,600 for appraisal, title, lender fees, recording, prepaid taxes and insurance, and the rest of it.

Then there is the spend nobody budgets. A washer and dryer if the seller takes theirs, blinds for nine windows, a lawn mower, a ladder, the repair the inspection turned up that the seller would not credit you for. I have watched three different people put $6,000 on a card in their first eight weeks.

Payment against true monthly

How the tax and insurance actually get paid

Most lenders collect property tax and homeowners insurance from you every month and hold the money in an escrow account, then pay the bills on your behalf when they fall due. Your statement shows one combined figure, and people read that figure as the mortgage payment.

Which means the payment moves. When the tax assessment or the insurance premium rises, the lender recalculates the escrow and your monthly total changes, with no new loan, no new rate and nothing you did.

That annual adjustment catches first time owners every year without fail. The number you agreed at closing is the number for roughly twelve months.

The shortcut

Take 1.5 per cent of the purchase price, divide by 12, and add it to whatever the calculator told you. On $420,000 that is $6,300 a year, or $525 a month.

That one line covers maintenance and the accumulated small recurring stuff reasonably well. It deliberately does not cover property tax, insurance or mortgage insurance, because those three are not rules of thumb. They are quotes you can obtain in an afternoon for a specific address.

So the honest version is two steps. Add the 1.5 per cent to get past the calculator's optimism, then replace the tax and insurance guesses with real numbers for the actual house.

What it does to the rent comparison

He was paying $2,700 in rent. Against the quoted $2,389 the house looked like a saving of $311 a month, which is why he sent me the screenshot in the first place.

Against $3,587 it is $887 a month more than his rent.

That comparison is still not quite fair to the house, and here is the part that makes it fair. Some of that $3,587 is not a cost at all. In the first month, the interest on $378,000 at 6.5 per cent is $2,047.50, so of the $2,389.22 payment, $341.72 reduces what you owe. That $341.72 is money moving from one pocket to another, and it grows every single month for thirty years.

Call it roughly $3,245 of genuine monthly cost and roughly $342 of forced saving, in month one. Compare that against rent and you have an honest number, which is a different and much better question than the one the calculator answered.

Three phone calls

Before you fall for a listing, pull the county tax record for that exact address, get one insurance quote using the address and the year the roof was replaced, and if there is an association, ask for the reserve study and the fee history.

That is an afternoon. It converts four of the seven lines above from rules of thumb into facts about a specific building.

Take whatever number your calculator gave you, add 1.5 per cent of the price divided by twelve, and sit with the result for a minute. If it still works, go and make the three phone calls. If it does not, you have saved yourself a run of open houses and the particular disappointment of falling for a kitchen you cannot afford to heat.